Book Excerpt

Book Excerpt: Thriving in the New Economy

From the time Bear Stearns was sold, throughout the entire next six months until Lehman Brothers was allowed to go bankrupt, it was clear that the rangers were looking for a way to contain this forest fire. The lesson we all got from the depression was that a lack of liquidity only exacerbates the problem. So to the government's credit, it inundated the markets—I mean swamped the markets, flaunted them, with cash of various sizes and ways of getting the money in. For example, it had the Troubled Asset Relief Program (TARP) money, then it had the Term Asset-Backed Securities Loan Facility (TALF) money, and before the TARP money, it was going to loan money to the banks to make loans, which I found a bit contradictory because that's what got us in trouble. Too many people were borrowing money that they couldn't pay back.

Economic Reality

As the economy began to respond to this financial crisis, people reacted by pulling their horns in. General Motors and Chrysler were on the edge. Ford is a different story. I push Ford over to the side because Ford borrowed a lot of money—a lot of older money—and still has it. When sales of automobiles tanked, dropping from $12 million a year to $11 million, then to $10 million, and now it looks like $9.5 million, GM's and Chrylser's market shares eroded. They both ended up needing to be put into bankruptcy, but not before the government gave them significant sums of money in December 2008. I said it then and will say it again now: There was a strong feeling that Chrysler and General Motors should have been allowed to go bankrupt in December 2008.

But the government gave them something like $60 or $80 billion. Will the government ever get it back? Who knows. In order for General Motors to be worth $50 billion, and assuming the 500 million shares of stock outstanding was there and not wiped out in bankruptcy, the stock would have to go to $100 a share. I don't see it in the cards.

So we have put ourselves in a position where we have dissipated enormous pools of assets; we have exchanged them for assets such as homes and cars that have had a significant erosion in value. How do you deal with that? …

The president said properly in early June 2009 that we do not have any more money. At least we understand that if we print any more money, we are almost guaranteeing the problems that I am concerned about.

So none of us alive, none of us, and I am going to be 74, have seen anything like this. It is all new. We are looking at an environment where huge sums of paper called money are flooding the system. That was a necessary condition for activity in September 2008. The Fed is monetizing the federal government's debt. That typically leads to inflation. All of us who remember the 1970s remember stagflation. We had an economy that was stagnant and prices that were going through the roof, not because of supply and demand but because of this enormous flood of cash.

When I read in the paper that the government is going to start allowing some of the financial institutions to repay the TARP money, I found that very constructive. But that doesn't take away from the fact that we have a fundamental underlying problem, which is this surge of cash coming. And I don't know how we can have a robust economy with our two biggest industries—housing and autos—in the tank.

Now maybe I am wrong, but I do not see the automobile industry really perking up for a couple of years. I think you look at supply and demand of homes, and we probably have a three-year window. Yet through it all, I am optimistic. The first step to solving a problem is to acknowledge that you have a problem. We are doing that. The second step is to determine what technique to use to address the problem. What can I do to try to solve the problem? I am very concerned that we have gone beyond reasonable limits in funding all these different institutions. I am not sure I agree with this notion. I know we had to do it to prevent a depression. But I am still concerned about it.

New Economy Strategy

Through this entire crisis, starting at the onset all the way through the advance phase in September, I made sure Invemed Associates stayed highly liquid. We made sure our credit and our cash had jumped big time. It stayed at that level because we have significant investments, either mine or the firm's, and if there was an investment opportunity we would have a chance to participate. But more importantly, we made certain that we were not dependent on the banks for whatever capital means we had.

Hopefully the wickedness of this entire period is going to make it easier for people to be mindful of the fact that leverage needs to have limitations. The guy who rents you money expects to get his money. We are now learning how much damage has been done. It is like a person in a head-on collision—the recovery is going to take longer than he thinks. Our eyes are now wide open. I am not sure I agree with this surge of paper. I am not sure I would not say, "Wait a minute, the idea is not to get this thing back up where it was. The idea is to sort of get it back up on a sound footing, and then go from there.'' I would feel a lot better about that.

Debt has its place. That said, I hope all of us understand the risks of excess leverage, and of excess borrowing. When you live in such a way that your survival depends on the sun shining each and every day, you are living on the edge of a very unrealistic expectation.

Investing Criteria

I am always looking for opportunities. One person's pain is another person's pleasure. We are looking for companies with very strong balance sheets, with good and protectable cash flows. Companies whose management has demonstrated the willingness or the desire to have some form of shareholder reward—hopefully dividends, but maybe buybacks. We are looking for companies that can sustain themselves and their capital needs. Because I think now we all know that the banks have been badly wounded.

Many of them are now so-called penny stocks. But that's okay. I am looking for companies with balance sheets that are so strong that the cash they have is close to or greater than the price of the stock. One of the companies we invest in is called SourceForge. That is the old VA Linux. Then there's the textile company called Unified, for which I am a member of the board. I am hopeful that we will be able to get something done there. We certainly have a good management team in place at Unified. Financially, we have our back to the wall; we have some significant debt, but the cash flow is good. We are keeping the facilities in tip-top shape.

Regrettably, the textile industry is moving offshore—not entirely, but a significant percentage that impacts it. Other sectors that I keep an eye on are education and medical technology, or biotech devices. I also look at health care stocks in general and some retail companies. I always have my eyes open for things. I have more time now to contemplate an investment than I did before because the markets are not moving that quickly.